Stockton, the bankrupt California city, is trying to force bond insurer Assured (AGO:US) Guaranty Corp. to accept $100 million in losses instead of seeking more concessions from labor unions, the company said.
The city filed a Chapter 9 bankruptcy on June 28 after months of talks failed with creditors, including Assured and labor officials. In a statement today, Assured said that its claims should be treated the same as those of other creditors, including any filed by employees.
“Chapter 9 was not intended to be used as a sword to prefer one class of similarly situated creditor over another,” according to the statement.
Stockton said it filed for bankruptcy after negotiating with creditors on an out-of-court restructuring of its debts. Last month, the city released details of the cuts it sought during those talks. The federal judge in Sacramento who is overseeing the bankruptcy barred the city from releasing any counteroffers it received from creditors.
Before Stockton’s filing, Assured suggested areas the city should consider cutting to avoid bankruptcy, Assured Chief Executive Officer Dominic J. Frederico said in a telephone interview today.
Stockton’s financial problems won’t be fixed by trying to persuade U.S. Bankruptcy Judge Christopher Klein to throw out much of the city’s long-term debt, Frederico said. Even if all long-term debt was eliminated, the city would still be left with unsustainable costs for employee wages, pensions and health benefits, he said. Those costs are higher for Stockton than for many of its peers in California, he said.
“You’ve got to look at all the costs,” Frederico said.
Assured, based in Hamilton, Bermuda, fell 1.4 percent to $11.81 at 3:40 p.m. in New York Stock Exchange composite trading. The shares earlier dropped as much as 3.1 percent.
Marc Levinson, a bankruptcy lawyer for Stockton, said Assured never gave the city a formal counter-proposal.
“Instead it’s given us a press release,” he said in a phone interview today. “Our goal, and I’m sure Assured feels the same way, is to reach some sort of an agreement.”
Stockton is trying to become the first American city since the Great Depression to use bankruptcy to successfully force bondholders to take less than the principal they’re owed. The California city of Vallejo used its bankruptcy last year to persuade its main lender to take a lower interest rate and a longer-repayment schedule.
Stockton used Assured Guaranty to insure $125 million in pension obligation bonds the city issued 2007. The money was used to plug an unfunded pension liability with a payment to the California Public Employees’ Retirement System.
After losses on CalPers investments, the $125 million is now worth less than $100 million, according to California Common Sense, a nonprofit research institute that advocates for better transparency in government finances.
Brad Pacheco, a spokesman for CalPers, and Marc Levinson, the lead bankruptcy lawyer for Stockton, didn’t immediately return calls requesting comment on Assured’s statement.
Stockton “gambled on the stock market” with money from the bond issue and now cannot afford to pay it back in full, the city said in a document describing its proposals to creditors.
The city says it plans to cut payments on the remaining principal by about 83 percent. That would leave Assured with about $100 million in losses tied to the debt, the company said.
In its bankruptcy petition, the city listed assets of more than $1 billion and debt of more than $500 million. The filing was followed by Mammoth Lakes, California. San Bernardino, California, which faces similar budget woes, last month voted to file bankruptcy.
The city will need approval from the judge to impose any cuts on creditors.
The case is In re Stockton, 12-32118, U.S. Bankruptcy Court, Eastern District of California (Sacramento).
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